More than 80% of US syndicated loans contain at least one fee type and contracts typically
specify a menu of spread and different types of fees. We test the predictions of existing theories
about the main purposes of fees and provide supporting evidence that: (1) fees are used to price
options embedded in loan contracts such as the draw-down option for credit lines and the
cancellation option in term loans; and (2) fees are used to screen borrowers about the likelihood
of exercising these options. We also propose a new total-cost-of-borrowing measure that includes
various fees charged by lenders.
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